Paint stocks mixed as analyst says multi-year de-rating underway for sector

Paint stocks Asian Paints, Berger Paints and Kansai Nerolac were trading mixed on Thursday, February 12, as brokerage firm Morgan Stanley said a multi-year de-rating is underway for the sector.

The analyst has 'underweight' ratings on the three paint stocks and sees up to a 17.6% potential downside on them.



The brokerage said growth volatility over the last two quarters has reinforced its view that the predictability of growth in the paints sector is waning.

Incumbents are guiding for mid-to-high single-digit value growth over the medium term, the analyst said.

Weakening moats, low growth and elevated valuations continue to support its de-rating thesis, Morgan Stanley added.

The analyst has 'underweight' ratings and target prices of 2,126 on Asian Paints, 400 on Berger Paints and 1919 on Kansai Nerolac, indicating downside of 11%, 17.6% and 7.5%, respectively.

In the December quarter, Asian Paints reported a decorative volume growth of 7.9%, which was at the lower end of the CNBC-TV18 poll of 8-9%. Its managing director and CEO Amit Syngle said the paints company is expecting its volume growth to remain in the range of 8-10% in the coming quarters.

Meanwhile, Berger Paints' volumes grew 8.5% in the third quarter. Its gross margins touched their highest level in 15 quarters, supported by input cost moderation. However, EBITDA margin remained under pressure due to negative operating leverage as well as sustained investments in brand building, as per the management.

Earlier this month, Kansai Nerolac managing director Pravin Chaudhari said looking forward, the growth momentum is expected to be maintained in automotive and performance coatings. However, the recovery in decorative will continue to be gradual, Chaudhari said.

Here's a roundup of all the brokerage recommendations for the three paint stocks:

Stock	Buy	Hold	Sell
Asian Paints	14	8	16
Berger Paints	12	5	8
Kansai Nerolac	8	6	5

Shares of Asian Paints and Kansai Nerolac were down 0.2% and 2%, respectively around 9.30 am on Thursday, while of Berger Paints gained 1.2%.

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